Mason Gaffney: A Cannan Gets the
Edwin Cannan (1861-1935) is best known
for his 1904 edition of The Wealth of Nations. His other best-known
work is a History of Theories of Production and Distribution,
1893. His book most relevant here is History of Local Rates in
England, 1896. He was Professor at the London School of Economics, 1907-26,
although a large inherited fortune let him reside at Oxford and dabble at London
part-time. He criticized both Marshall and Keynes, although without much effect.
His later work
drew little enthusiasm.
In 1907 Cannan fired off a round at local rating of site values. It hit
home. First he recited the logic of what today we call the "tragedy of the commons" (it
was common coin long before Garrett Hardin). Then he pointed out that a city
taxing only site values to provide free public services would attract too many
people and too much capital. A city is an "open economy," free to immigration
of everything but land, something like an open range or fishery. Even if all cities tax only site values, cities with
more rents per head may support public services at higher levels, and so attract
immigrants. This distorts locational decisions, attracting people to jobs of
lesser productivity where they may gain from better public services. This is "Cannan's
There are three bad results from Cannan's Law.
- One is an uneconomical distribution of population, as cities with more
rentable lands attract more of mobile labor and capital than they should. That
is not to deny that people are attracted to New York for good economic
reasons. Rather, it is that distributing economic rent freely to all
comers attracts people above and beyond the good economic reasons.
move to New York to earn high wages, well and good; but in addition
they may receive a high quality college education from CCNY, the "poor man's
Harvard," paid from local property taxes. In the glory days of the
Mesabi iron range, children of immigrant Finnish miners there in Hibbing,
enjoyed some of the best schooling in the country, paid from local
property taxes on iron ore. In Alaska and Alberta, workers receive
high wages to
overcome the harsh climate, remote locations, and other disamenities.
That is economically sound, but in addition they get a cash dividend
from the overflowing oil revenues. All that tends to draw more people,
like flies swarming to fresh pie, than the wages warrant.
- A second bad result is what economists call "dissipation of economic
rent." To make it simple, consider a rich but crowded fishery
where another fishing boat added to the crowd will not raise the total
at all, but simply take fish from other crews who were already there.
Interlopers will keep entering until the average boat and crew just
make costs, leaving
no net rent for anyone. This has long been standard economic lore.
As Cannan writes, if a locality uses its rents to benefit all its "inhabitants," people
will flock to the richest places until there is no further gain to
immigrants because they have wiped out all the rent.
- A third bad result of Cannan's Law is to lower the incentive of local
governments to provide public services that are open to all comers. It
fosters local institutions and attitudes that are harshly hostile to
newcomers and outsiders, especially to the poor, young, homeless, hungry,
As Woody Guthrie, the Okie bard, sang of California, "Believe it or not,
you won't find it so hot, if you ain't got that do-re-mi." That was
in 1935; it is truer today.
Cannan goes on to say that if we are to tax site values, the tax should
be national. It is not clear how sincere he is -- his style is carping, condescending,
elitist and unsympathetic. Still, his logic implies it, and he does say it,
however grudgingly. On this point the great Alfred Marshall agreed, in a
spirit (positive, that is, for Marshall, a famously "two-handed" economist).
... read the whole article
Mason Gaffney: Canada's System of Revenue
The last time I discussed this subject was in Las Vegas before a tax group.
I started out by saying 'I hope there are no Canadians here!' It would be
vain to say that to this group, so I'll say I hope there are no sober Canadians
here, at least none who possess a high degree of expertise on this subject,
because I may have to skip over some of the high spots. I lay some claim
to being Canadian myself, I should say. I have two children who have dual
citizenship because they originated in Canada, or possibly three children
depending on where you stand on the right-to-life controversy. But at any
rate I would like to emphasise that the
Canadian system of revenue distribution, fiscal sharing, or equalisation
as we call it in Canada, is much more based on correct principle than the
one you find in the United States. By 'correct principles' I mean
the ones I just enunciated.
At any rate, let's begin by looking at the similarities between the federal
systems in the United States and Canada. In both countries we find something
called 'vertical balancing' which means that the senior governments
send money to the junior governments. We find also something called 'horizontal
balancing' which means that the payments are made more to the poorer
governments, those that are poorer on a per capita basis, than to richer
ones. We have the principle that the Crown may not tax the Crown. We've an
economic principle, which I'll call Cannan's Law. The cannan here is not a weapon,
but an economist of very little note, Edwin Cannan, who however did make
one very important point. He made it in the period when the single tax in
England was on everyone's lips. And if you read the Economic Journal,
the stuffy, establishmentarian journal of the economics profession, it's
full of criticisms of the Single Tax.
No respectable English economist could fail to write at least one article
criticising the Single Tax. And Edwin Cannan criticised it in the following
way. He said, in effect, local taxation of land makes private land an open
range. His idea was something like Garret Hardin's idea of the 'tragedy of
the commons'. Or I should put it the other way around because Hardin came
later and he obviously borrowed from those who wrote earlier. But the
general idea is, you may think you have tenure control of land but if the
municipal government can tax that land and use that money to finance public
welfare services, public education and other things that are open to all
comers, then you will end up with an uneconomical distribution of population. You'll
have more people clustered around the honey pot in places like Vancouver
where there's a lot of economic rent per capita than you will in areas with
less economic rent per capita.
So we found in the mining country of Northern Minnesota back in the days
when iron ore was worth something. They had the best schools in the mid-west
there at the iron mines and all those Finnish miners' kids got first rate
educations. You run into them everywhere now: they've become an awful nuisance
-- very well educated though.
All this tends to distort the economical allocation of population and also
to reduce the incentive of local government to provide public services that
are open to all comers. That I refer to as Cannan' s Law. And you find that,
of course, in all countries. It's an economic law. ... read the whole article